In this piece, we’ll take a closer look under the hood of FDN and examine its unique portfolio.

• ETFdb Category: Technology Equities
• Sector: Internet
• Expense Ratio: 0.57%
• Index: Dow Jones Internet Index

First Trust’s DJ Internet Index Fund is one of only three funds offering hyper-targeted exposure to the internet industry. Its underlying index selects only companies that generate at least 50% of their annual revenue/sales from the internet. In addition, each selected stock has at least a three-month average market capitalization of at least $100 million, a three-month average closing price above $10, and sufficient trading activity [see also Under the Hood of the Social Media ETF].

Given this criteria, it’s not surprising to discover that FDN’s portfolio is relatively small, holding only about 40 individual securities. The fund features a nice mix of giant-, large-, and mid-cap companies, as well as meaningful exposure to smaller capitalization firms.

According to First Trust, an “internet company” is one that rakes in at least half of its revenues from the internet. This definition is quite vague, and a closer look at the fund’s underlying holdings does not exactly clarify the label.

In FDN’s portfolio, First Trust categorizes the holdings in the following way:

Not surprisingly, the majority of the companies are labeled as “Information Technology”. There are, however, a few unique standouts, such as financial and health care companies.

According to Morningstar, FDN’s portfolio components can also be classified in the following way:

FDN’s portfolio consists of 31 Information Technology holdings, each of which provides varying products and services. Here is a look at a few of those companies [see also the Technology Equities ETF Cheat Sheet]:

• Facebook (FB): This online social media giant allows users to create personal profiles, add friends, exchange messages, as well as post status updates and photos.

• Google (GOOG): In addition to operating one of the largest search engines in the world, Google also offers online advertising technologies, cloud computing, social networking (Google+), and an office suite.

• LinkedIn (LNKD): This company is a business-oriented social networking service, mainly used for creating and expanding professional relationships.

• Twitter (TWTR): Twitter is a social networking and microblogging service that allows users to send and read short 140-character text messages (tweets).

• Juniper Networks (JNPR): This firm designs, develops and sells products and services that provide its customers with network infrastructure, including scalable routing and switching products as well as network security and network services applications.

Here are a few of the other most notable holdings:

• Amazon.com (AMZN): This famous online retailer provides customers with merchandise and content purchased for resale from vendors and those offered by third-party sellers. It also provides advertising services and co-branded credit card agreements.

• Expedia, Inc. (EXPE): This firm provides travel products and services with its portfolio of brands, which include Expedia.com, hotels.com, Hotwire.com, the TripAdvisor Media Network, and Classic Vacations.

• Groupon (GRPN): This company provides a local e-commerce marketplace that connects companies with consumers by offering goods and services at a steep discount.

• Priceline Group, Inc. (PCLN): This online travel company offers customers various travel services, including hotel rooms, car rentals, airline tickets, vacation packages, cruises and destination services.

• TripAdvisor, Inc. (TRIP): This online travel company provides access to the reviews and opinions of millions of travelers to help plan the perfect trip.

Since inception, FDN has only logged in two negative calendar years of trading; once in 2008, shedding more than 44%, and again in 2011, sliding nearly 6%. Its biggest annual return was in 2009, when the fund gained nearly 80% on the year.

First Trust’s DJ Internet Index Fund (FDN) is by far the most popular option for investors looking to tap into this fast growing industry. While the definition of “internet company” may be vague, the fund’s methodology results in a diversified portfolio.

Follow me on Twitter @DPylypczak.

Disclosure: No positions at time of writing.